Implementing Endogenous Inside Options in Nash Wage Bargaining Models

FEMM Working Paper No. 14/2005

26 Pages Posted: 7 Nov 2006

See all articles by Andreas Knabe

Andreas Knabe

Otto-von-Guericke-Universit├Ąt Magdeburg - Institute of Economics and Business Administration; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: July 2005

Abstract

The game-strategic foundation of the Nash bargaining solution by a Rubinstein (1982) alternating-offers game shows that in wage bargaining models the threat point should be the inside, instead of the outside, option. So far, this insight has been largely ignored in the labor economics literature. Our model provides a new way to implement inside options into Nash wage bargaining models. The solution to the dynamic bargaining system resulting from the endogeneity of inside options can serve as a basis for richer, though still easily applicable, models of wage bargaining that are more in accordance with their game-theoretical underpinnings. The dynamics of the model also provide a theoretical justification for temporarily delayed labor market responses to policy changes.

Keywords: dynamic wage bargaining, labor unions, inside options

JEL Classification: J50, C78

Suggested Citation

Knabe, Andreas, Implementing Endogenous Inside Options in Nash Wage Bargaining Models (July 2005). FEMM Working Paper No. 14/2005. Available at SSRN: https://ssrn.com/abstract=942999 or http://dx.doi.org/10.2139/ssrn.942999

Andreas Knabe (Contact Author)

Otto-von-Guericke-Universit├Ąt Magdeburg - Institute of Economics and Business Administration ( email )

Universitaetsplatz 2
Magdeburg, 39016
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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